1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
EXCHANGE ACT OF 1934 For the transition period from
__________ to ___________
For the transition period from ____________ to ___________
Commission File Number: 0-6334
BRAINWORKS VENTURES, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 87-0281240
(State of Incorporation) (IRS Employer ID Number)
101 MARIETTA STREET, SUITE 3450, ATLANTA, GEORGIA 30303
(Address of principal executive offices)
(404) 524-1667
(Issuer's telephone number, Including area code)
(Former name, former address and former fiscal year, if changed
since last report)
---------------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 2,457,934 shares as of
August 15, 2001.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
2
BRAINWORKS VENTURES, INC.
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2001
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheet as
of June 30, 2001................................................... 3
Consolidated Statements of Operations
for the Three Months Ended
June 30, 2001 and June 30, 2000.................................... 4
Consolidated Statements of Cash Flows
for the Three Months Ended
June 30, 2001 and June 30, 2000.................................... 5
Notes to Consolidated Financial Statements......................... 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...... 8
PART II - OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS ..................... 9
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K .............................. 10
SIGNATURES ............................................................. 12
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRAINWORKS VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2001
ASSETS
Current assets:
Cash and cash equivalents $ 653,000
Accounts receivable 173,000
Other receivables 25,000
Due from officers/stockholders 14,000
Prepaid expenses and other current assets 27,000
-----------
Total current assets 892,000
Fixed assets, net of accumulated depreciation of $35,000 358,000
Investments in non-marketable equity securities (at cost), including convertible
note receivable of $50,000 255,000
Intangible assets, net of accumulated amortization of $393,000 2,762,000
-----------
Total assets $ 4,267,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 424,000
Due to officer/stockholder 5,000
-----------
Total current liabilities 429,000
-----------
Stockholders' equity
Common stock, $0.01 par value; authorized 25,000,000 shares;
issued and to be issued 2,458,000 shares 25,000
Additional paid-in capital 8,124,000
Accumulated deficit (2,454,000)
Deferred compensation (1,797,000)
Stock subscriptions receivable (60,000)
-----------
Total stockholders' equity 3,838,000
-----------
Total liabilities and stockholders' equity $ 4,267,000
===========
See accompanying notes to consolidated financial statements
3
4
BRAINWORKS VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30,
--------------------------------
2001 2000
------------ ------------
Revenues-consulting $ 131,000
Cost of revenues 80,000
------------
Gross profit 51,000
Expenses:
Selling and administrative expenses 855,000 $ 1,512,000
------------ ------------
Loss from operations (804,000) (1,512,000)
Gain on sale of securities 1,139,000
Interest and dividends 9,000 11,000
------------ ------------
Loss before income taxes (795,000) (362,000)
Income tax provision 330,000
------------ ------------
Net loss $ (795,000) $ (692,000)
============ ============
Net loss per common share-basic and diluted $ (0.35) $ (0.69)
============ ============
Weighted average number of shares outstanding-basic and diluted 2,249,000 1,000,000
============ ============
See accompanying notes to consolidated financial statements
4
5
BRAINWORKS VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30,
--------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (795,000) $ (692,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 295,000
Gain on sale of securities (1,139,000)
Stock issued for compensation 13,000 1,327,000
Deferred compensation amortization 372,000
Changes in operating assets and liabilities
Accounts receivable (51,000)
Prepaid expenses and other current assets 2,000
Other receivable 4,000
Accounts payable and accrued liabilities 53,000
Income taxes payable 330,000
------------ ------------
Net cash used in operating activities (107,000) (174,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition expenses (78,000)
Proceeds from sale of investments 1,411,000
------------ ------------
Net cash (used in) provided by investing activities (78,000) 1,411,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note receivable from officer/stockholder 225,000
Collections of stock subscriptions receivable 2,000
Proceeds from the sale of treasury stock 8,000
------------ ------------
Net cash provided by financing activities 227,000 8,000
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 42,000 1,245,000
Cash and cash equivalents, beginning of period 611,000 248,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 653,000 $ 1,493,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Value of options issued $ 1,251,000 $ --
Value of stock issued for acquisition $ 554,000 $ --
Value of stock issued for fixed assets $ 32,500 $ --
Value of stock issued for compensation $ 13,000 $ --
See accompanying notes to consolidated financial statements
5
6
BRAINWORKS VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
Brainworks Ventures, Inc. ("BWV"), together with its wholly owned subsidiaries,
Brainworks Ventures Labs, Inc. ("BVL") and Executive Ventures Partners, Inc.
("EVP"), referred to as the "Company", is a Nevada corporation. The Company
develops, invests in and operates internet and other technology companies
located primarily in the southeastern United States. On February 14, 2001, BWV
completed the acquisition of BVL, which is a venture development company that
provides business consulting services to early stage technology companies.
On May 8, 2001 BWV acquired EVP, a consulting company that specializes in the
development and implementation of corporate venturing programs. EVP's target
clients are Fortune 2000 companies and government research laboratories. EVP
works with clients to identify undervalued assets that can be commercialized and
provides the resources and management talent to build a business around those
assets. EVP also works with businesses to establish corporate venturing programs
that manage corporate venture capital funds designed to make strategic
investments.
The accompanying unaudited, consolidated, condensed financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated. These unaudited financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America and in accordance with the instructions
to Form 10-QSB for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, these statements include all adjustments consisting of normal
recurring accruals and considered necessary for fair presentation. Operating
results for the three-month period ended June 30, 2001 are not necessarily
indicative of the results that may be expected for the year ending March 31,
2002. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's 2001 Annual Report on Form
10-KSB.
The Company has sustained a significant operating loss for the quarter ended
June 30, 2001 and such losses are expected to continue. Further, the Company's
operating activities have generated negative cash flow. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans include raising additional capital and/or debt financing or
the sale of the Company. There is no assurance that such capital and/or debt
financing will be available on terms acceptable to the Company. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
NET LOSS PER SHARE
Basic and diluted loss per share for the three month periods ended June 30, 2001
and 2000 are computed based on the weighted average number of common
shares outstanding. The computation of diluted net loss per share is similar to
the computation of basic net loss per share, except that the denominator is
increased to include the number of additional common shares that would have been
issued. However, the Company's computation of diluted net loss per share does
not assume any conversion or exercise of securities, as their effect is
anti-dilutive for all periods presented.
NOTE B - ACQUISITION
On May 8, 2001, BWV acquired EVP. All of the outstanding common stock of EVP was
exchanged for 500,000 shares of BWV's common stock with a fair value of
$554,000. The stock issued in the acquisition includes a provision for
"piggy-back" registration rights. Certain shareholders of EVP were also
shareholders or directors of the Company prior to the acquisition and received
390,000 shares of the total shares exchanged. The transaction was accounted for
as a purchase pursuant to Accounting Principle Board No. 16 Accounting for
Business Combinations (APB 16).
The assets acquired, liabilities assumed and the cost of the acquisition were as
follows:
Assets acquired:
Current assets, principally accounts and unbilled
receivables $ 122,000
Fixed assets 5,000
Intangible assets 497,000
---------
$ 624,000
=========
Liabilities assumed:
Accounts payable and accrued liabilities $ 35,000
Due to stockholder 35,000
Common stock issued to EVP stockholders at fair value 554,000
---------
$ 624,000
=========
6
7
BRAINWORKS VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
In addition, the Company incurred acquisition costs of approximately $78,000 in
connection with the acquisition of EVP which is being amortized over a 36 month
period.
The following unaudited pro forma condensed statements of operations (in
thousands, except per share data) assumes the EVP acquisition occurred on April
1, 2001 and 2000. In the opinion of management, all adjustments necessary to
present fairly such unaudited pro forma statements have been made.
2001 2000
------- -------
Revenue $ 220 $ 0
Net loss $ (763) $ (743)
Net loss per share $(0.31) $(0.50)
NOTE C - RECLASSIFICATION
Certain items in the Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 2000 have been reclassified to conform to current year
classifications. Such reclassifications had no effect on previously reported
income.
7
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain statements contained in this Quarterly Report on Form 10-QSB
are "forward-looking statements," within the meaning of the Private Securities
Litigation Reform Act of 1995, and are thus prospective in nature. Such
forward-looking statements reflect management's beliefs and assumptions and are
based on information currently available to management. The forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause actual results, performance or achievements of the Company to differ
materially from those expressed or implied in such statements. There can be no
assurance that such factors or other factors will not affect the accuracy of
such forward-looking statements.
RESULTS OF OPERATIONS
For the three months ended June 30, 2001 and 2000, the Company recorded
revenues of $131,000 and $0, respectively, along with other income of $9,000 and
$1,150,000, respectively. The increase in revenue is primarily due to consulting
revenue earned by EVP. The decrease in other income of $1,141,000 is primarily
due to the gain on the sale of La Fonda capital stock held by the Company which
occurred in fiscal-year 2000.
For the three months ended June 30, 2001 and 2000, the cost of revenue
was $80,000 and $0, respectively. The increase in cost of revenue is primarily
due to $45,000 of payroll expenses, $24,000 of consulting expenses and $10,000
of travel and related expenses incurred in the three months ended June 30, 2001.
For the three months ended June 30, 2001, total selling, general and
administrative expenses of $855,000 included a $372,000 non-cash compensation
charge, consulting expenses of $25,000, rent expenses of $33,000, professional
fees of $80,000 and depreciation and amortization of $295,000. For the three
months ended June 30, 2000, total selling, general and administrative expenses
of $1,512,000 included consulting expenses of $120,000 and stock issued for
compensation of $1,327,000 related to (i) non-qualified options granted to
Donald Ratajczak, the Company's Chief Executive Officer and Chairman of the
Board, and Marc J. Schwartz, the Company's Chief Financial Officer, Vice
President, Treasurer and Secretary, prior to their appointment as officers and
directors of the Company, and (ii) options granted to advisors to the Company.
The changes in operations resulted in a net loss for the three months ended June
30, 2001 of $795,000 compared to a net loss for the comparable period ended June
30, 2000 of $692,000.
For the three months ended June 30, 2001, working capital decreased by
$190,000 from March 31, 2001. This decrease was principally due to cash used in
operations resulting from the current period loss, collection of a $225,000
note receivable from an officer for the exercise of stock options, an increase
in accounts receivable and other receivables of $169,000 and the conversion of
a note receivable from Intelligent Education, Inc. to a non-current investment
in non-marketable equity securities, an increase in accounts payable and
accrued liabilities of $121,000, during this period cash and cash equivalents
increased by approximately $40,000.
The Company continues to incur significant operating costs. These costs
primarily consist of payroll expenses, professional fees and consulting
expenses. The Company's ability to attain profitability depends on its ability
to increase consulting revenues from EVP and BVL.
For the three months ended June 30, 2001, net cash used in operating
activities was $107,000, net cash used in investing activities was $78,000 and
net cash provided by financing activities was $227,000. For the three months
ended June 30, 2000, net cash used in operations was $174,000, net cash provided
by investing activities was $1,411,000 and net cash provided by financing
activities was $8,000. The change in net cash from operating activities was
primarily due to the
8
9
increase in depreciation and amortization of $295,000 primarily due to the
acquisitions of EVP and BVL, decrease in non-cash compensation of $1,314,000
and increase in amortization of deferred compensation of $372,000 for options
issued in 2000 and 2001. The change in net cash from investing activities was
primarily due to a decrease in cash provided from the sale of investments of
$1,411,000 and expenses related to the Company's acquisition of EVP incurred in
the three months ended June 30, 2001. The Company expects that its cash flows
from operations, cash on hand and the expected proceeds of capital raising
activities will be sufficient to maintain operations for the next twelve
months.
LIQUIDITY AND CAPITAL RESOURCES
Current assets as of June 30, 2001 of $892,000 represents a decrease in
current assets of $64,000 from the March 31, 2001 fiscal-year end and a decrease
in current assets of $726,000 from the comparable period ended June 30, 2000.
Total assets as of June 30, 2001 of $4,267,000 represents an increase in total
assets of $303,000 from the March 31, 2001 fiscal-year end and an increase in
total assets from the comparable period ended June 30, 2000 of $2,649,000. These
increases in total assets were primarily due to the acquisition by the Company
of BVL and EVP, which acquisitions occurred on February 14, 2001 and May 8,
2001, respectively.
While management believes that these acquisitions should assist the
Company in pursuing its business direction, management's plans include seeking
additional capital or debt financing or the possible sale of the Company. As of
the date of this report there are no firm arrangements that provide for such
additional capital or debt financing. There is no guarantee that such additional
capital or debt financing will be available when and to the extent required, or
that if available, it will be available on terms acceptable to the Company.
INFLATION
The Company does not currently view the effects of inflation as having
a material effect on the Company's business.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 8, 2001, the Company consummated the merger (the "Merger") of
EVP with and into EVP Acquisition Corporation, a Georgia corporation and a
wholly-owned subsidiary of the Company ("EVP Acquisition"), whereby EVP became a
wholly-owned subsidiary of the Company pursuant to an Agreement and Plan of
Merger dated May 8, 2001, by and among the Company, EVP Acquisition, EVP and all
the former stockholders of EVP (the "Merger Agreement").
Pursuant to the Merger Agreement, all of the issued and outstanding
shares of EVP's common stock, no par value per share ("EVP Common Stock"), were
converted into the right to receive an aggregate of 500,000 shares of the
Company's common stock, par value $.01 per share (the "Common Stock"), 31,252
shares of which are being held in escrow to satisfy certain indemnification
claims that the Company may make pursuant to the Merger Agreement for breaches
of representations and warranties set forth therein (the "Merger
Consideration").
Pursuant to the Registration Rights Agreement dated May 8, 2001, all
the shares constituting the Merger Consideration are entitled to certain
"piggy-back" registration rights.
9
10
The securities issued in connection with the Merger have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
in reliance upon the exemption in Section 4(2) of the Securities Act. The
Company based such reliance upon factual representations made to the Company by
the stockholders of EVP as to such stockholders' investment intent and
sophistication, among other things.
On June 08, 2001, the Company issued 2,000 shares of Common Stock to an
employee of the Company in consideration for services rendered to the Company.
These shares were issued without registration under the Securities Act in
reliance upon the exemption of Section 4(2) of the Securities Act. The Company
based such reliance on oral representations made by such employee to the Company
as to such employee's investment intent and sophistication, among other things.
On June 08, 2001, the Company issued 5,000 shares of Common Stock to a
supplier of the Company in partial payment for goods received by the Company.
These shares were issued without registration under the Securities Act in
reliance upon the exemption of Section 4(2) of the Securities Act. The Company
based such reliance upon the limited nature of the issuance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger dated May 8, 2001, by and among
the Company, EVP, EVP Acquisition and the stockholders of EVP
(the "Merger Agreement"). (Certain of the exhibits and
schedules to the Merger Agreement have been omitted from this
Report pursuant to Item 601(b)(2) of Regulation S-B, and the
Company agrees to furnish copies of such omitted exhibits and
schedules supplementally to the Securities and Exchange
Commission ("SEC") upon request.)(*)
4.1 Registration Rights Agreement entered into in connection with
the Merger Agreement.(*)
4.2 Escrow Agreement entered into in connection with the Merger
Agreement.(*)
* Incorporated by reference to the Company's Current Report on Form 8-K
filed with the SEC on May 23, 2001.
(b) Reports on Form 8-K
Since April 1, 2001, the Company has filed the following Current
Reports on Form 8-K or Form 8-K/A:
(1) The Company's Current Report on Form 8-K filed with the SEC on
May 23, 2001, reporting under Item 2 of such report the
Company's acquisition of EVP (the "EVP 8-K");
(2) The Company's Current Report on Form 8-K/A filed with the SEC
on May 30, 2001, setting forth the (i) audited financial
statements of BVL as of December 31, 2000 and for the year
ended December 31, 2000 and the periods from November 5, 1999
(inception) to December 30, 1999 and November 5, 1999
(inception) to December 30, 2000; and (ii) unaudited pro forma
condensed consolidated financial statements for the twelve
months ended December 31, 2000, which report amended Item 7 of
the Company's
10
11
Current Report on Form 8-K filed with the SEC on February 28,
2001, reporting under Item 2 of such report the Company's
acquisition of BVL; and
(3) The Company's Current Report on Form 8-K/A filed with the SEC
on August 16, 2001, amending Item 7 of the EVP 8-K to set
forth the (i) audited financial statements of EVP as of March
31, 2001, and for the period from May 1, 2001 (commencement of
operations) to March 31, 2001; and (ii) unaudited pro forma
condensed consolidated financial statements for the year ended
March 31, 2000.
11
12
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BRAINWORKS VENTURES, INC.
By: /s/ Marc J. Schwartz
-----------------------------------------
Marc J. Schwartz
Vice President/Treasurer
Dated: August 20, 2001
12
13
EXHIBIT INDEX
2.1 Agreement and Plan of Merger dated May 8, 2001, by and among the
Company, EVP, EVP Acquisition and the stockholders of EVP (the "Merger
Agreement"). (Certain of the exhibits and schedules to the Merger
Agreement have been omitted from this Report pursuant to Item 601(b)(2)
of Regulation S-B, and the Company agrees to furnish copies of such
omitted exhibits and schedules supplementally to the SEC upon
request.)(*)
4.1 Registration Rights Agreement entered into in connection with the
Merger Agreement.(*)
4.2 Escrow Agreement entered into in connection with the Merger
Agreement.(*)
* Incorporated by reference to the Company's Current Report on Form 8-K filed
with the SEC on May 23, 2001.
13